On the global stage
It has always been challenging to analyse every single emerging trend impacting the $87 trillion global economic market. However, when you look at the bigger picture today it’s clear that the likely major macro driving force leading our transition into 2021 will be the recovery from COVID-19.
As the world continues to battle through the biggest economic downturn in modern history, the current forecast indicates that more than 90 per cent of countries will experience an economic contraction. But contractions are inevitably followed by recovery – what will the recovery look like in 2021? Policies such as money printing 2.0 and a lower band of zero interest rates will take central banks into an unprecedented new monetary era. For FX markets, and economies, with rates near or below zero, the impact of government action will become even more important.
There is hope, and quite a lot of it too, with the roll-out of an estimated $15 trillion worth of stimulus both injected and pledged across the world. Incredibly, stimulus programs in the UK, Japan and Germany are already 10 times the size of those seen during the GFC. One major risk – is that we don’t have a tailwind of trade to support global economies like we had post the GFC. The recovery in global trade, which lost considerable momentum under the weight of the US-China trade wars, will be another major driving force for economic and currency volatility.
Driven by hope – the AUD & USD
The Australian dollar/US dollar has been slowly losing ground ever since the market topped out at $1.10 back in 2011. More recently, global growth lagged and the Reserve Bank of Australia cut interest rates three times, leading the Australian dollar/US dollar to suffer a slow descent for most of 2018 and 2019.
The move lower reached a crescendo as the impact of COVID-19 became apparent, and governments around the world put economies into lockdown. However, the Australian dollar surged mid-2020, jumping 35 per cent between March and August, as hopes for a quick recovery boosted risk-sentient markets like global equities and the Australian dollar.
Looking to 2021, the Australian dollar, traditionally tied to global growth expectations, could rally as positive news of the global economy starts to build in the market. For businesses and investors with foreign currency exposure, a major rally in the Australian dollar could be a major risk in 2021.
The RBA also continues to consider further policy action but its long-discussed aversion to negative interest rates means the options might be limited. With central banks around the world moving to negative rates, the RBA’s reluctance could boost the Australian dollar next year.
What could derail an Australian dollar/US dollar rally next year? The trajectory of the Australian dollar is also dependent on the waves of COVID-19 globally, which for now have been more unpredictable than expected.
Politics, politics, politics
Political tensions played out on the global stage are taking a significant role in economies around the world. Brexit, US trade tensions, the Australian relationship with China and anti-globalisation nationalism have seen politics become an increasingly unpredictable element in financial markets.
The UK’s Brexit woes have defined the interactions between Australia and the UK over the last four years with toing and froing over its political leadership, post-Brexit relationship with Europe and global trade relations driving much of the activity. The rising US-China trade wars, and similarly, the tensions between Australia and China, have seen the Australian dollar increasingly pressured as trade between the two countries is increasingly unstable.
While Joe Biden has been announced as the US President-elect, there is still a long way to the White House and it’s anticipated that any change in the US-China relationship is unlikely to shift swiftly. With Mr Biden to take control on 20 January – geopolitics – probably – might become more predictable but challenges remain domestically.
Anticipating the risk
After a decade of steady growth in global GDP and relatively low market volatility governments, businesses and business owners are in a new paradigm as the effects of COVID-19 continue to ripple through domestic economies, financial markets and global supply chains.
Forces such as loose monetary policy, negative interest rates and rising commodity prices continue to drive FX volatility. However, we rarely hear about the challenges that corporate practitioners face amid increased uncertainty in timing of payments for goods and services.
Preparing for the year ahead, decision-makers must stay focused on the basic building blocks of hedging strategy development. Regularly reviewing and updating tactics that have been put in place is imperative to ensuring that your company’s FX risk management objectives are met.
Looking to 2021 the future of the FX market isn’t as transparent as the markets would prefer, yet as much as we hate to say it – we’re in unprecedented times.
Steven Dooley, currency strategist, Western Union Business Solutions